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Labrador Iron Ore Royalty Corporation - Results for the First Quarter Ended March 31, 2012

May, 03, 2012

TORONTO, May 3, 2012 /CNW/ - Labrador Iron Ore Royalty Corporation (TSX: LIF.UN) announced today its operation and cash flow results for the first quarter ended March 31, 2012.

Royalty income for the first quarter of 2012 amounted to $22.0 million as compared to $30.3 million for the first quarter of 2011. The unitholders' cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the first quarter was $14.4 million or $0.23 per unit as compared to $48.0 million or $0.75 per unit for the same period in 2011.  Net income was $23.0 million or $0.36 per unit compared to $38.9 million or $0.61 per unit for the same period in 2011. Equity earnings from IOC amounted to $11.2 million or $0.18 per unit as compared to $19.2 million or $0.30 per unit in 2010. Cash flow for the quarter was lower than last year as a result of lower royalty revenue but mainly because IOC did not pay a dividend this year (2011 first quarter $29 million). IOC deferred the payment of a dividend due to ongoing labour negotiations and substantial capital expenditures. This will be reviewed during the third quarter. IOC has now reached agreement with its unionized employees on a new six year labour agreement.

All net income, adjusted cash flow and per unit figures referred to in this report use the totals according to the financial statements plus (where applicable) the $7,488,000 ($0.234 per stapled unit) interest on the subordinated notes.

Production during the quarter was adversely affected by winter weather conditions and somewhat by the start-up of the new ore delivery system and the additional grinding mill. The integration of the new system and mill has commenced, and ongoing commissioning continues with operational handover and full production planned for mid-year which should result in increased production and sales for the balance of the year. Sales for the quarter were affected by the lower production and the timing of shipments. Royalty income for the quarter was lower than last year's first quarter due to the lower sales volume and pricing that was lower than last year's first quarter (although higher than the last quarter). It was also adversely affected by a reduction of $1.5 million due to the new pricing mechanism which is based on the current quarter rather than the previous quarter. This pricing system invoices sales at an estimated price and then adjusts prices to actual in the next quarter. The strength of the Canadian dollar against its U.S. counterpart continued to negatively impact royalty revenue and IOC earnings.

Results for the three months ended March 31 are summarized below:

  2012   2011
  (Unaudited)
       
Revenue (in millions) $22.4   $30.7
Adjusted cash flow (in millions) $14.4   $48.0
Adjusted cash flow per unit $0.23   $0.75
Net income (in millions) $23.0   $38.9
Net income per unit $0.36   $0.61
       

"Adjusted cash flow" (defined as cash flow from operating activities as shown on the attached financial statements adjusted for changes in amounts receivable, accounts payable and income taxes payable) is not a recognized measure IFRS.  The Directors believe that adjusted cash flow is a useful analytical measure as it better reflects cash available for distributions to unitholders.

A summary of IOC's sales in millions of tonnes is as follows:

  3 Months
Ended
Mar. 31,
2012
  3 Months
Ended
Mar. 31,
2011
  Year
Ended
Dec. 31,
2011
           
Pellets 1.85   2.27   8.71
Concentrates(1) 0.50   0.28   4.85
Total 2.35   2.55        13.56

(1) Excludes third party ore sales

Proposed Tax Changes

On July 20, 2011, the Ministry of Finance announced proposed amendments to the Income Tax Act concerning stapled securities. Under the proposal, when debt and equity are stapled together and trade as a unit, the interest on the debt portion of the stapled security would not be deductible in computing income for tax purposes. The announcement has an effective date of July 20, 2012.  Management is studying the effect of this announcement on LIORC, while they await the details of the proposed legislation.

Outlook

With a new six year labour agreement in place and the completion of the commissioning of phase 1 of the expansion project expected shortly IOC expects to have substantially increased production going forward. Markets remain firm and pricing has recovered somewhat from the weakness that took place late last year and the consensus appears to be that pricing should remain firm for the balance of the year. We expect that royalty revenue should increase for the balance of the year.

Management's Discussion and Analysis

The following discussion and analysis should be read in conjunction with the Management's Discussion and Analysis section of the Corporation's 2011 Annual Report and the interim financial statements and notes contained in this report.  Although management believes that expectations reflected in forward-looking statements are reasonable, such statements involve risk and uncertainties including the factors discussed in the Corporation's 2011 Annual Report.

The Corporation's revenues are entirely dependent on the operations of Iron Ore Company of Canada (IOC) as its principal assets relate to the operations of IOC and its principal source of revenue is the 7% royalty it receives on all sales of iron ore products by IOC.  In addition to the volume of iron ore sold, the Corporation's royalty revenue is affected by the price of iron ore and the Canadian - U.S. dollar exchange rate.

The sales of IOC are usually 15% - 20% of the annual volume in the first quarter, with the balance spread fairly evenly throughout the other three quarters.  For 2012, because of the coming on stream of the phase one expansion, we expect first quarter sales to be less than 15% of sales for the year. Because of the size of individual shipments some quarters may be affected by the timing of the loading of ships that can be delayed from one quarter to the next.

Royalty income for the first quarter of 2012 amounted to $22.0 million as compared to $30.3 million for the first quarter of 2011. The unitholders' cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the first quarter was $14.4 million or $0.23 per unit as compared to $48.0 million or $0.75 per unit for the same period in 2011.  Net income was $23.0 million or $0.36 per unit compared to $38.9 million or $0.61 per unit for the same period in 2011. Equity earnings from IOC amounted to $11.2 million or $0.18 per unit as compared to $19.2 million or $0.30 per unit in 2010. Cash flow for the quarter was lower than last year as a result of lower royalty revenue but mainly because IOC did not pay a dividend this year (2011 first quarter $29 million). IOC deferred the payment of a dividend due to ongoing labour negotiations and substantial capital expenditures. This will be reviewed during the third quarter. IOC has now reached agreement with its unionized employees on a new six year labour agreement.

All net income, adjusted cash flow and per unit figures referred to in this report use the totals according to the financial statements plus (where applicable) the $7,488,000 ($0.234 per stapled unit) interest on the subordinated notes.

The first quarter sales of IOC are traditionally adversely affected by the closing of the St. Lawrence Seaway and general winter shipping conditions and are not indicative of the full year's sales.

Production during the quarter was adversely affected by winter weather conditions and somewhat by the start-up of the new ore delivery system and the additional grind mill. The integration of the new system and mill has commenced, and ongoing commissioning continues with operational handover and full production planned for mid-year, which should result in increased production and sales for the balance of the year. Sales for the quarter were affected by the lower production and the timing of shipments. Royalty income for the quarter was lower than last year's first quarter due to the lower sales volume and pricing that was lower than last year's first quarter (although higher than the last quarter). It was also adversely affected by a reduction of $1.5 million due to the new pricing mechanism which is based on the current quarter rather than the previous quarter. This pricing system invoices sales at an estimated price and then adjusts prices to actual in the next quarter. The strength of the Canadian dollar against its U.S. counterpart continued to negatively impact royalty revenue and IOC earnings.

The following table sets out quarterly revenue, net income and cash flow data for 2012, 2011 and 2010.

  Revenue Net
Income
Net
Income
per Unit
Adjusted Cash
Flow(1)
Adjusted
Cash Flow
per Unit(1)
Distributions
Declared
per Unit
             
  (in millions except per Unit information)          
2012              
First Quarter(2) $22.4 $23.0 $0.36 $14.4   $0.23 $0.375
2011              
First Quarter(2) $30.7 $38.9 $0.61 $48.0 (3) $0.75 $0.75
Second Quarter(2) $38.1 $48.2 $0.75 $23.0   $0.36 $0.375
Third Quarter (2) $54.9 $76.3 $1.19 $63.7 (4) $0.99 $0.75
Fourth Quarter(2) $38.8 $45.9 $0.72 $23.4   $0.37 $0.375
2010              
First Quarter $16.7 $15.7 $0.25 $22.3 (5) $0.35 $0.375
Second Quarter $52.5 $69.1 $1.08 $30.5   $0.48 $0.375
Third Quarter(2) $40.9 $64.4 $1.02 $85.9 (6) $1.34 $0.50
Fourth Quarter(2) $54.3 $62.8 $0.99 $31.9   $0.50 $1.00

Notes: (1) "Adjusted cash flow" (see below)         
  (2) Commencing with third quarter 2010, net income, adjusted cash flow, distributions and per unit figures referred to in this table use the totals according to the financial statements plus (where applicable) the $7,488,000 ($0.234 per unit) interest on the subordinated notes    
  (3) Includes a $29.0 million IOC dividend        
  (4) Includes a $31.2 million IOC dividend        
  (5) Includes a $11.5 million IOC dividend        
  (6) Includes a $62.2 million IOC dividend        

 

Standardized Cash Flow and Adjusted Cash Flow
For the Corporation, standardized cash flow is the same as cash flow from operating activities as recorded in the Corporation's cash flow statements as the Corporation does not incur capital expenditures or have any restrictions on distributions.  Standardized cash flow per unit was $0.26(1) for the quarter (2010 - $0.23(1)). Cumulative standardized cash flow from inception of the Corporation is $16.39 per unit and total cash distributions since inception are $15.52 per unit, for a payout ratio of 95%.

"Adjusted cash flow" is defined as cash flow from operating activities as shown on the attached financial statements adjusted for changes in amounts receivable, accounts and interest payable and income taxes payable.  It is not a recognized measure under IFRS.  The Directors believe that adjusted cash flow is a useful analytical measure as it better reflects cash available for distributions to unitholders.

The following reconciles cash flow from operating activities to adjusted cash flow.

  3 Months Ended
Mar. 31, 2012
  3 Months Ended
Mar. 31, 2011
Standardized cash flow from operating activities $16,827,813   $14,721,526
Excluding: changes in amounts receivable, accounts payable and income taxes payable            (9,896,919)   25,811,810
Adjusted cash flow(1) $6,930,894    $40,533,336 
Adjusted cash flow per unit(1) $0.11   $0.63

(1) Excludes note interest on subordinated notes paid directly to unitholders of $7,488,000 or $0.117 per unit.

Liquidity

The Corporation has a $50 million revolving credit facility to September 18, 2013 with provision for annual one-year extensions.  No amounts are currently drawn under this facility (2011 - nil) leaving $50 million available to provide for any capital required by IOC or other Corporation requirements.

Proposed Tax Changes

On July 20, 2011, the Ministry of Finance announced proposed amendments to the Income Tax Act concerning stapled securities. Under the proposal, when debt and equity are stapled together and trade as a unit, the interest on the debt portion of the stapled security would not be deductible in computing income for tax purposes. The announcement has an effective date of July 20, 2012.  Management is studying the effect of this announcement on LIORC, while they await the details of the proposed legislation.

Outlook

With a new six year labour agreement in place and the completion of the commissioning of phase 1 of the expansion project expected shortly IOC expects to have substantially increased production going forward. Markets remain firm and pricing has recovered somewhat from the weakness that took place late last year and the consensus appears to be that pricing should remain firm for the balance of the year. We expect that royalty revenue should increase for the balance of the year.

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
May 3, 2012

LABRADOR IRON ORE ROYALTY CORPORATION          
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS      
               
               
         
    As at  
      March 31,      December 31,  
Canadian $    2012     2011  
      (Unaudited)         
Assets            
Current Assets            
  Cash  $ 41,813,997     41,498,184  
  Amounts receivable   22,581,600     40,669,780  
  Income taxes recoverable   5,027,347     392,173  
Total Current Assets   69,422,944     82,560,137  
               
Non-Current Assets            
Iron Ore Company of Canada ("IOC"),            
  royalty and commission interests    285,789,872     287,131,292  
Investment in IOC   310,013,926     299,280,483  
Total Non-Current Assets   595,803,798     586,411,775  
               
Total Assets  $ 665,226,742   $ 668,971,912  
               
               
Liabilities and Shareholders' Equity            
Current Liabilities            
  Accounts payable  $ 4,863,302     8,419,389  
  Interest payable on subordinated notes    7,488,000     7,488,000  
  Distributions payable to shareholders    16,512,000     16,512,000  
Total Current Liabilities   28,863,302     32,419,389  
               
Non-Current Liabilities            
Deferred income taxes   116,020,000     114,830,000  
Subordinated notes   248,000,000     248,000,000  
Total Non-Current Liabilities   364,020,000     362,830,000  
               
Total Liabilities   392,883,302     395,249,389  
               
Equity             
  Share capital    69,708,147     69,708,147  
  Retained earnings    218,024,293     219,001,376  
  Accumulated other comprehensive loss    (15,389,000)     (14,987,000)  
      272,343,440     273,722,523  
               
Total Equity and Liabilities  $ 665,226,742      668,971,912  
               
               
Approved by the Directors,            
               
               
(signed) Bruce C. Bone     (signed) Alan R. Thomas  
Director         Director      

 

LABRADOR IRON ORE ROYALTY CORPORATION      
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
      For the Three Months Ended
      March 31, 
Canadian $    2012     2011
      (Unaudited)      
Revenue          
  IOC royalties  $ 22,010,073   $   30,280,217
  IOC commissions   231,003     250,969
  Interest and other income    122,212     132,789
      22,363,288     30,663,975
Expenses          
  Newfoundland royalty taxes   4,402,015     6,056,043
  Amortization of royalty and commission interests   1,341,420     1,058,368
  Administrative expenses    584,060     400,152
  Interest expense:          
    Credit facility   93,493     92,465
    Subordinated notes    7,488,000     7,488,000
      13,908,988     15,095,028
             
Income before equity earnings and income taxes   8,454,300     15,568,947
Equity earnings in IOC   11,205,443     19,251,468
             
Income before income taxes    19,659,743     34,820,415
             
Provision for income taxes          
  Current    2,864,826     5,088,794
  Deferred   1,260,000     (1,696,000)
      4,124,826     3,392,794
             
Net income for the period   15,534,917     31,427,621
             
Other comprehensive income (loss)          
  Share of other comprehensive (loss) of IOC, net of taxes    (402,000)     (372,000)
             
Comprehensive income for the period  $ 15,132,917   $   31,055,621
             
Net income per common share  $ 0.24    $   0.49

 

LABRADOR IRON ORE ROYALTY CORPORATION          
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS    
            
           
         
           
    For the Three Months Ended
    March 31,
Canadian $      2012   2011
          (Unaudited)  
Net inflow (outflow) of cash related to the following activities          
           
           
Operating            
  Net income for the period  $ 15,534,917   $   31,427,621
  Items not affecting cash:          
    Equity earnings in IOC   (11,205,443)     (19,251,468)
    Current income taxes   2,864,826     5,088,794
    Deferred income taxes   1,260,000     (1,696,000)
    Amortization of royalty and commission interests   1,341,420     1,058,368
    Interest expense   7,581,493     7,580,465
  Common share dividend from IOC   -     28,994,815
  Change in amounts receivable and accounts payable   14,532,093     (12,209,092)
  Interest paid    (7,581,493)     (7,580,465)
  Income taxes paid    (7,500,000)     (18,691,512)
  Cash flow from operating activities   16,827,813     14,721,526
                 
Financing            
  Distributions paid to unitholders   (16,512,000)     (56,512,000)
  Cash flow used in financing activities   (16,512,000)     (56,512,000)
           
Increase (decrease) in cash, during the period   315,813     (41,790,474)
           
Cash and cash equivalents, beginning of period   41,498,184     73,611,888
               
Cash, end of period  $ 41,813,997   $  $ 31,821,414

 

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
         
 
 
 
Canadian $ 



 
 
Capital
stock






 
 
Retained
earnings






Accumulated
other 
comprehensive 
income (loss)






 


Total
    (Unaudited)    
                       
Balance as at December 31, 2010 $   69,708,147   $   147,934,994   $   (4,271,000)   $   213,372,141
Net income for the period   -     31,427,621     -     31,427,621
Dividends declared to shareholders   -     (40,512,000)     -     (40,512,000)
Share of other comprehensive loss from investment in IOC   -     -     (372,000)     (372,000)
Balance as at March 31, 2011   69,708,147     138,850,615     (4,643,000)     203,915,762
                       
Balance as at December 31, 2011   69,708,147     219,001,376     (14,987,000)     273,722,523
Net income for the period   -     15,534,917     -     15,534,917
Dividends declared to shareholders    -     (16,512,000)     -     (16,512,000)
Share of other comprehensive loss from investment in IOC   -     -     (402,000)     (402,000)
Balance as at March 31, 2012 $   69,708,147   $   218,024,293   $   (15,389,000)   $   272,343,440

 

The complete consolidated financial statements for the first quarter ended March 31, 2012, including the notes thereto, are posted on sedar.com and labradorironore.com.